Chancellor given more Budget freedom as public deficit lower than forecast

(ShareCast News) - Public sector borrowing was lower than expected in August, as government spending remains depressed by austerity programmes but allowing the Chancellor's a little room for a fiscal boost in his forthcoming budget.
Public sector net borrowing excluding stakes in banks stood at £5.67bn in August, the Office for National Statistics revealed on Thursday, below the £6.9bn level from the same month last year and the consensus forecast for £6.4bn.

The total UK public deficit was £5.09bn, much lower than the consensus estimate of £7.1n and £6.3m last year, while following a revised surplus of £1.29bn from July this year.

After August's low borrowing, the cumulative total in the fiscal year has reached £28.3bn, down £0.2bn on the same months of 2016/17 and the lowest for this stage since 2007.

In its March forecast, the Office for Budget Responsibility forecast borrowing to rise by 13% this year.

Total central government receipts fell by 0.1% year-over-year, compared to average growth in the first four months of 2017/18 of 4.5%, with the decline driven by a reduction in expenditure by government departments.

If the trend continues, borrowing will total about £46bn for the full 2017/18 fiscal year, said economist Sam Tombs at Pantheon Macroeconomics, well below the OBR's Budget forecast of £58bn.

"The trend will deteriorate toward the end of this fiscal year, because a bumper batch of self-assessment receipts collected in January and February 2017, due to prior tax changes, will not be repeated. Even so, borrowing now appears to be on track to come in at about £50bn, clearly below the OBR's March forecast."

Paul Hollingsworth at Capital Economics said the figures will come as welcome news to the Chancellor in the lead up to November's Budget and further increases the scope to ease back on austerity a touch.

As well as the unwinding of temporary factors such as the shift in self-assessment receipts, Hollingsworth said the public finances figures early in the fiscal year "are prone to significant revisions and so should be treated with some caution", while the recent rise in gilt yields will increase debt-interest spending further.

"Nonetheless, if the trend in the public finances seen so far this fiscal year continues, then borrowing would undershoot the OBR's forecast by £13bn. Even if that figure shrinks a little, the Chancellor is still likely to have some extra money to play with - on top of the scope already contained within the fiscal rules. As a result, some easing back on austerity, to help households struggling in the face of the squeeze on real incomes, looks likely."

Pantheon's Tombs felt it was doubtful that Philip Hammond will ease the fiscal consolidation significantly in the Budget on 22 November, with the OBR likely to revise down its optimistic forecast for wage growth and revise up its forecast for debt interest payments.

"In addition, the Chancellor likely will retain scope to ease the fiscal consolidation in the event of a damaging hard Brexit, rather than ease policy now."